China Yongda Automobiles Services Holdings Limited's (HKG:3669) Stock Retreats 29% But Earnings Haven't Escaped The Attention Of Investors

China Yongda Automobiles Services Holdings Limited (HKG:3669) shares have had a horrible month, losing 29% after a relatively good period beforehand. Longer-term, the stock has been solid despite a difficult 30 days, gaining 17% in the last year.

Although its price has dipped substantially, China Yongda Automobiles Services Holdings may still be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 20.2x, since almost half of all companies in Hong Kong have P/E ratios under 10x and even P/E's lower than 5x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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China Yongda Automobiles Services Holdings hasn't been tracking well recently as its declining earnings compare poorly to other companies, which have seen some growth on average. One possibility is that the P/E is high because investors think this poor earnings performance will turn the corner. If not, then existing shareholders may be extremely nervous about the viability of the share price.

See our latest analysis for China Yongda Automobiles Services Holdings

Keen to find out how analysts think China Yongda Automobiles Services Holdings' future stacks up against the industry? In that case, our free report is a great place to start.

What Are Growth Metrics Telling Us About The High P/E?

In order to justify its P/E ratio, China Yongda Automobiles Services Holdings would need to produce outstanding growth well in excess of the market.

Retrospectively, the last year delivered a frustrating 64% decrease to the company's bottom line. This means it has also seen a slide in earnings over the longer-term as EPS is down 91% in total over the last three years. Accordingly, shareholders would have felt downbeat about the medium-term rates of earnings growth.

Turning to the outlook, the next three years should generate growth of 43% per year as estimated by the twelve analysts watching the company. That's shaping up to be materially higher than the 14% per annum growth forecast for the broader market.

With this information, we can see why China Yongda Automobiles Services Holdings is trading at such a high P/E compared to the market. It seems most investors are expecting this strong future growth and are willing to pay more for the stock.

The Final Word

China Yongda Automobiles Services Holdings' shares may have retreated, but its P/E is still flying high. While the price-to-earnings ratio shouldn't be the defining factor in whether you buy a stock or not, it's quite a capable barometer of earnings expectations.

We've established that China Yongda Automobiles Services Holdings maintains its high P/E on the strength of its forecast growth being higher than the wider market, as expected. Right now shareholders are comfortable with the P/E as they are quite confident future earnings aren't under threat. Unless these conditions change, they will continue to provide strong support to the share price.

We don't want to rain on the parade too much, but we did also find 2 warning signs for China Yongda Automobiles Services Holdings that you need to be mindful of.

Of course, you might also be able to find a better stock than China Yongda Automobiles Services Holdings. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.